US oil exports may encourage more crude, NGL production

08 January 2014 21:39 Source:ICIS News

US oil exports may encourage more crude, NGL productionBy Al Greenwood

HOUSTON (ICIS)--The US may remove restrictions on oil exports, which could reduce refiner margins but encourage more production of crude and natural gas liquids (NGLs), a key petrochemical feedstock.

The restrictions on exports were put in place more than 30 years ago in response to the oil crisis of the 1970s. Under the Export Administration Act of 1979, the US can only export crude oil to neighbours Canada and Mexico.

Some are now questioning the need for such restrictions because US oil production has risen sharply, due to new techniques such as hydraulic fracturing and horizontal drilling.

US oil production likely increased to an average of 7.5m bbl/day in 2013, up 1.0m bbl/day year over year, according to the Energy Information Administration (EIA). In 2012, US oil production was 6.5m bbl/day. During the recession in 2008, it was 5.0m bbl/day, close to a 60-year low.

Much of the new production is in light grades of crude. Many US refineries accommodate much heavier grades, especially along the Gulf Coast.

Rising light-crude production could exceed the nation's refining capacity, and the resurgence of US oil production would collide with the ban on exports, said Senator Lisa Murkowski (Republican-Alaska), a member of the Senate Energy and Natural Resources Committee.

She has called for the removal on the export restrictions.

If the US government acts, it could remove the restrictions on exports by 2015, according to a research note from the investment bank Barclays.

If the US were to remove the export restrictions, it would increase margins for oil producers and reduce them for refiners, said Andy Lipow, president of Lipow Oil Associates. "This is really dividing up the pie."

With the ban lifted, prices of US oil would rise to freight-adjusted levels against Brent crude, Lipow said. Brent, likewise, could come under pressure since more supply would be reaching the world market.

Meanwhile, the expansion of the market should encourage more US oil production, Lipow said.

This is significant because oil is not the only product that comes out of wells. Oil wells also produce associated gas as a by-product, and associated gas is a source of NGLs.

Because associated gas is a by-product of oil, companies will continue producing it regardless of prices for NGLs – as long as crude production remains profitable.

Already, NGL production has increased because of the advent of shale gas and tight oil, giving US petrochemical producers a cost advantage against much of the world. US producers rely predominantly on NGLs as a feedstock for their crackers, while much of the world relies on oil-based naphtha.

Looking ahead, US producers will need to secure more NGLs to provide feedstock for several new crackers and plant expansions.

North American companies also plan to build nine propane dehydrogenation plants (PDH), which are on-purpose propylene units that use propane as a feedstock.

Increased production of associated gas would also support new US terminals that would export ethane and liquefied petroleum gas (LPG).

For refiners, though, they would likely see margins decline, Lipow said.

Already, one refiner, Valero, has called for the US to maintain the current export system.

Under it, companies can apply for a license to export limited amounts of crude while preserving the bulk of US production for domestic use, Valero said. 

"The current system has significantly reduced American dependence on foreign oil, kept US refining utilisation high and insulated American consumers from geopolitical shocks than can cause volatility in oil prices," Valero said in a statement.

Valero warned that unlimited exports could increase costs, cause job losses, reduce refining capacity and make the US more dependent on foreign oil.

"Valero believes it makes more sense to keep crude oil here in the US, where it can be refined into value-added products for domestic and export use," the company said.

In fact, US exports of refined products have increased sharply.

US refiners have benefitted from this price gap between West Texas Intermediate (WTI) and Brent, Barclays said in its research note. They have used their access to lower cost oil to capture market share from European refiners.

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By Al Greenwood